| EDITOR'S NOTE: Houston-based Tudor, Pickering, Holt & Co. has emerged as a major player in energy finance. Formed in 2007, the firm is engaged in investment banking and securities (equity research, sales, and trading) along with the management of an energy-focused private equity fund. Like many of its employees, Bobby Tudor and Dan Pickering left behind successful careers with major players in energy finance to form a firm intent on doing things a different way. OGFJ Editor Don Stowers recently visited with several members of the team, including Bobby Tudor, chairman and CEO; Dan Pickering, co-president and head of securities; Maynard Holt, co-president and head of upstream investment banking; Alexandra Pruner, CFO; and several others. |
Don Stowers, Editor, OGFJ
OIL & GAS FINANCIAL JOURNAL: Tudor, Pickering, Holt & Co. was formed in 2007 with the merger of Tudor Capital and Pickering Energy Partners. What was your vision for the firm when you and Dan decided to join forces?
BOBBY TUDOR: After returning to Houston in 2005, with the changes and consolidation that had taken place in energy investment banking in recent years, I felt there was a space in the market to create an investment banking firm with a genuine focus on providing clients with quality, independent advice. After meeting with Dan and his team and gaining an appreciation for how they operated, I was convinced this combination would be successful. Partnering with Dan and his team allowed us to accelerate the vision considerably. The Pickering brand brought us immediate name recognition and provided a daily client contact. Having the best energy research in the business gave us a knowledge base that we could leverage firm wide, and a 100% energy focused sales and trading team gave us a big advantage with capital markets executions.
OGFJ: Dan, you left a well-respected boutique investment bank and essentially started from scratch in 2004 to build Pickering Energy Partners into a successful securities firm. Why did you decide to join TPH?
DAN PICKERING: When I made the decision to form Pickering Energy Partners, I did it because I had a different view not only on the content of the research but also on its delivery. Prior to transitioning to equity research, I was a fund manager for Fidelity. Institutional investors are constantly monitoring the markets and modifying their positions. I felt that we could pattern our securities business in a manner that best met the needs of our clients by sending a concise daily summary of the most important macro and company-specific events impacting the energy sector – hence The Morning Note (a daily energy note sent out to institutional investors, industry executives, and other industry professionals). After meeting with Bobby and discussing the vision for the combined firm, the underlying design of our securities business didn't change. What did change is that the combined firm has the ability to leverage the securities business with other service offerings to become industry leaders in each area.
OGFJ: That was three years ago. Can you discuss company growth during this period?
TUDOR: We aren't surprised by the strides we have made, given the caliber of the employees we have been able to assemble here at the firm, and the opening in the market that we believed existed for a firm like ours. Our strategy from the outset rested on the premise that highly technical research and deep operating knowledge are crucial components for success in the energy investment banking space, and this has really resonated with our corporate and institutional clients.
Today, we have 83 employees dedicated exclusively to the energy industry via a fully developed securities and investment banking practice for the upstream, oilfield service, and midstream subsectors. Our equity analysts consistently garner top rankings in third-party surveys and are an influential voice in the energy equity markets while our investment banking team has put us at the top of many league tables. Our research is the best in the business, and we have built on that foundation what we think are equally good investment banking and private equity teams. Looking ahead, we expect to continue to evolve in logical progression, capitalizing on our intensive focus on the energy industry – through geographic expansion, sector step-outs, continued growth of our fixed income capabilities and further development of our complementary asset management platform.
OGFJ: The securities team was up and running when TPH was formed, but how have you been able to build the rest of the firm in such a short time?
TUDOR: Our investment banking team is among the largest – and as deep in experience – as any other energy group on "Wall Street." Our goal is to be sophisticated enough to work on the largest transactions yet nimble enough to be able to tackle perhaps smaller, but more complicated, transactions. Shortly after our inception in 2007, we were able to attract Ed Guay, Lance Gilliland, David Cunningham, and Maynard Holt to the firm to lead our midstream, M&A, oilfield services, and upstream efforts, respectively. The senior banking team was completed in early 2008 with the addition of Ward Polzin as the head of our A&D group. Bringing in these key individuals early on allowed us to not only hit the ground running with our clients, but it also gave us credibility when recruiting the rest of the team.
This past year, our affiliate, TPH Partners, chaired by the legendary Joe Foster, closed on its inaugural fund, TPH Partners I. Working closely with George McCormick, Curt Schaefer, and the rest of the TPH Partners team, they have already made five investments in the energy space. While it was an awful time to raise capital, it was excellent time to put money to work, so we are looking forward to watching this fund and its progress.
More recently, John Kennedy and Tom Ward were brought in to extend the reach of our capital markets and sales efforts.
OGFJ: Alie, you have been the firm's CFO since the merger of Tudor Capital with Pickering EP in 2007. How has the firm managed the rapid growth?
ALEXANDRA PRUNER: Even though the growth has been rapid – from some 20 people to more than 80 today – it has been very measured. Our team has been built out person by person and has focused on specific functions as we addressed each of the core areas of our expertise, be it A&D or private equity. We are fortunate to have a great corporate culture, which enables us to attract and retain a high quality staff. With that deliberate growth, we have the backbone that will support continued expansion. Next, we will focus on geographic expansion.
OGFJ: Bobby spoke about research as the foundation of the business. How does research complement the other parts of the firm?
TOM WARD: I think what distinguishes our firm is not only technical backgrounds, but the appreciation that our institutional clients don't want big cumbersome quarterly recaps, delivered long after their investment decisions have been made. Instead we produce and deliver daily updates on recent activities in the markets and what this means for sectors as well as individual stocks. Our view is that The Morning Note we send out each day resonates very well with our institutional clients. It's a different approach, but a lot of our team came from the buyside, so they have a good feel for what our clients need. We are growing our institutional client base each week, and in fact we are opening a New York office to help service the growing demand for our research insights. It's a nice position to be in.
OGFJ: David, as a founding member of Pickering EP, how have things changed for you at TPH?
DAVID PURSELL: First, the growth has been phenomenal. Pickering EP was founded with good timing as there was a strong "energy tail-wind" but even more important was our ability to hire talented and motivated people. Cliché? Yes. But hiring good people was the most important factor in our success and growth. The only thing I miss from the Pickering EP era is our air hockey table.
OGFJ: Your research comes each morning in the form of the TPH Morning Note. Can you comment on how you developed the format for the Note and how it's produced each day?
PICKERING: The format of The Morning Note was driven by listening to our institutional clients that were (and are) overwhelmed with information. We knew that to be relevant, we needed to get our thoughts and insights distributed in a way that was simple, straightforward, timely and quick to digest. Boiling down hours/days worth of work and research into concise bullets really makes our team think about what is important and cut out the fluff that is so common with Wall Street research. Our process starts about 2 pm with all the research team brainstorming on topics/content. By 6 pm, we have a first draft of our thoughts. By 6 am the following morning, we have a next-draft version. The issues are discussed among our research, sales, and trading teams at our morning meeting. Final edits are made, and The Morning Note goes out about 7:30 am Central time.
OGFJ: In addition to The Morning Note, what differentiates your research team?
TUDOR: I'll defer to my colleagues on some of this, but in a nutshell: the research group covers about 100 companies, in the US market, in the upstream, oilfield service, and midstream space. With the establishment of our London presence, we will pick up coverage of European companies. I think what distinguishes us is that many of our equity analysts are trained engineers and have had the benefit of operating experience. It is that real life insight that helps distinguish their capabilities. Lastly, we complement The Morning Note with intensive studies on topics of particular interest to energy investors. Most recently, we published an in-depth report on LNG.
OGFJ: What is your typical investor client and what is your distribution capability?
TUDOR: Our firm reaches out to almost all of the major institutional investors in the US and in Europe. We have nearly 500 clients worldwide that range from the largest mutual funds to energy sector specialty funds. Further, we will open offices in New York and in London in the next quarter to better serve our clients in those markets and extend our global reach. Asia and the Middle East sales efforts are also under consideration for the future.
OGFJ: How are your new efforts in capital markets going?
JOHN KENNEDY: We are off to a great start. This year we have been a manager in five equity offerings and three high yield offerings. Our clients – including Stone Energy, Berry Petroleum, Newfield Exploration, Concho Resources, Stallion Oilfield Services, Boardwalk Pipeline Partners, Brigham Exploration, and Global Geophysical – have raised over $1.2 billion in the equity market and $1.2 billion in the high yield market this year. As capital markets continue to improve, we expect to be very active for the balance of the year.
OGFJ: David, from a macro perspective, how has shale gas production impacted US natural gas markets?
PURSELL: Two words – game changer. For much of the past decade, gas production could not grow, which put a stranglehold on demand growth. Natural gas prices rose throughout the decade to limit demand growth. Shale gas has provided visibility that the US now has an ample gas supply for the foreseeable future. This abundance of gas should create a disparity with crude oil prices...hence our $90/bbl long-term oil price and $6.5/mcf long-term natural gas price. Over the long term, the combination of ample gas and cheap gas (vs. oil) should be a catalyst for meaningful US natural gas demand growth.
OGFJ: What are the major obstacles to developing oil and gas resources in the US?
PICKERING: For natural gas, it is the current low price. At $4-$5/mcf, the economics simply don't work for a meaningful portion of the industry. For oil, it is simply the challenge of finding reserves. Despite some new plays driven by technology deployment, the US is a very mature basin. The lack of a comprehensive government energy policy is an overarching impediment – whether it is possible fracturing legislation, repeal of deepwater royalty relief, carbon policy or access to acreage.
OGFJ: On the banking side, you operate in three sectors, covering both M&A and capital markets. What is the single hottest area of activity in energy investment banking today?
TUDOR: We are seeing activity in each sector. In April, we were an underwriter on an IPO for Global Geophysical, the first oilfield service IPO in three years. We were also involved in the Cobalt IPO last December. M&A activity overall is also picking up, with activity in the past two quarters nearly exceeding the total for the prior six quarters. Our midstream business has been particularly busy including recent assignments with Williams Partners, Western Gas Partners, and El Paso Pipeline Partners. In oilfield services, we advised TPG Capital on their acquisition of Valerus, and in upstream we recently advised Arena in their acquisition by SandRidge and are working on a number of divestitures. And, with the advent of the shale plays, we are having the opportunity to work with a number of companies in structuring joint ventures, to create constructive partnerships among parties with capital, acreage and operational know-how. From January 2008 through today, we've been in as many advisory deals as any other firm in the space.
OGFJ: What is your energy M&A outlook for the next 12 months?
LANCE GILLILAND: This year is off to a strong start. Transactions recently, and during the next year, will be driven by strategic rather than opportunistic financial reasons. Whether it's SandRidge buying Arena to continue its shift toward oil, ExxonMobil expanding its North American natural gas presence through acquiring XTO, or Halliburton strengthening its international product offering with Boots & Coots, industry acquirers are expanding their portfolios and willing to use their own stock to induce sellers to come to the table. The MLP sector is continuing to focus on structure simplification, as illustrated with transactions such as Magellan's merger with its publicly-traded GP, TEPPCO's merger into Enterprise, and the recent Williams Partners transactions which combine both of Williams' public MLPs and acquired virtually all of the midstream assets from Williams.
OGFJ: What about the state of the current A&D market?
WARD POLZIN: A combination of factors limited deal activity in early 2009. Buyers and sellers had divergent price expectations given the commodity price volatility. Also, many potential buyers were facing liquidity issues, and the capital markets were closed to all but the best issuers. However, deal flow, measured by volume and the number of deals, has increased dramatically over the last six months. The current market is characterized by three separate markets with distinct buyers and sellers: shale, conventional gas and oil. Each has a separate set of metrics and trends. Oil deals receive a premium relative to conventional gas. More than 50% of deals by volume are now driven by shale. Given the large capital requirements and unique operating requirements of shale, the JV option, as opposed to an outright sale, has become an attractive deal structure.
OGFJ: Will operators and participants in gas shale plays continue to do well even if current low natural gas prices continue into next year?
MAYNARD HOLT: The disconnect between oil prices and natural gas prices means that operators are balancing both longer term strategic opportunities against shorter term cash flow plays. Oil in any zipcode is hot right now. That being said, even Washington is acknowledging the value of natural gas as a leading energy source in the US, and operators recognize that now is the time to amass economic positions in this resource.
OGFJ: What's the overall philosophy behind the upstream team at TPH?
HOLT: We've built the team from the ground up with a particular vision in mind – combining client focus, transaction expertise, and industry/technical perspective to deliver comprehensive advice. Our focus is on understanding what our clients are doing and what they need. We seek to develop relationships and maintain regular dialogue with the full spectrum of upstream participants – from private operators to the full range of public companies. Bobby and I have been developing relationships in the sector for our entire careers, and we have extensive banking experience throughout the team, including Chad Michael, who is upstream focused, and Lance Gilliland, who is focused on energy M&A. We strive to leverage all that experience and combine it with the knowledge our technical team, Ward Polzin, who joined from Waterous by way of Enerplus, and Danny Rathan, who came from ConocoPhillips. The team brings an array of industry and transaction experience to the firm. We work together to bring the full breadth of banking, industry and technical expertise to every assignment. These efforts are all bolstered by the strength of our upstream research team.
OGFJ: On the midstream side, how are companies dealing with the changing dynamics in the natural gas market?
ED GUAY: The development of the variety of shale plays has provided tremendous growth opportunities for the midstream sector over the past few years as natural gas flows have changed dramatically. However, the size of the projects and softness in natural gas prices are factors that have increased the risk borne by the midstream companies. As a result, midstream companies are making a more careful evaluation of opportunities and considering creative ways to finance the projects. Joint ventures have been one popular methodology for midstream companies to gain footholds in attractive shale infrastructure. However, structuring such transactions is not simple, and the eventual unwind or restructuring of those deals can be quite challenging.
OGFJ: How has the volatility of the past two years affected the oilfield services sector?
DAVID CUNNINGHAM: The volatility in this cycle has been extreme. It felt extreme as we were going through the downturn, but from a historical perspective, it really was as severe as we have experienced. The rig count over the past 18 months, from peak to trough to recovery, was as severe a decline that this sector has ever experienced. The US rig count was down about 55% peak to trough. International, on the other hand, was down only 15%. There are a couple of takeaways from this. First, from peak to trough, the decline occurred in nine months (as severe and as quickly as any other down-cycle). Second, international is much less volatile (fewer rigs, but certainly more stability overall). As we look at the rebound that we have experienced, we observe that, based on rig count, the recovery was much quicker than we had seen historically. Our firm believed that the market over-reacted on the downside. However, the rebound has been more robust than expected, as well. The concern is that this may result in continued volatility.
OGFJ: Are you optimistic or pessimistic about the future of the energy industry overall?
TUDOR: Tremendously optimistic. Energy is the engine that helps economies develop. In order for China, India, Brazil, and other emerging nations to develop, they must provide sufficient energy to fuel their growth. Domestically, natural gas represents the best short-term solution for readily available resources that are more environmentally friendly, priced for broad market use, and abundantly available. The energy industry is always exciting – the technological feats rival anything in the space program or medical science.
OGFJ: Where do you see most of your future growth coming from – what business segment?
TUDOR: The investment banking team was really just formed in late 2007 to mid 2008, so we anticipate continued growth of market share in that area the longer we all have to work together. Asset management will also become an increasingly larger proportion of our overall business as we move forward.
OGFJ: Do you plan to expand into global markets?
PRUNER: Our business is largely US focused with offices in Houston, Denver, and soon New York, but, we are in the process of working with the regulatory authorities to set up a European-focused practice, headquartered in London. We are going to build out the London office in the same way we built our company: start with strong technical research, followed by institutional sales and then followed by advisory capabilities.
OGFJ: Your readers tell us they love the "Friday Humor" in The Morning Note, and it's hard to imagine another firm doing this. Where do you guys find all that stuff?
PICKERING: We love Friday Humor too. Our inspiration is everywhere. We've written about topics as diverse as Peak Fish, Sanjaya on American Idol, and KFC's Double Down chicken sandwich. We've even crafted a song about the Haynesville Shale. You've got to keep things fun in this business or the wear-and-tear will chew you up, so Friday Humor is one thing that likely will never change about The Morning Note.
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